Category

Industrials Sector

Brief Industrials: Hansol Technics Rights Offer Summary and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Hansol Technics Rights Offer Summary

1. Hansol Technics Rights Offer Summary

2

This post is a summary of Hansol Technics’s ₩52bil rights offer. Capital increases by 45.23%. Stockholders get new shares at a 0.37353 to 1 ratio. This is a standby underwriting. There is no cancellation risk. More details on this event are as follows.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Industrials: Hansol Technics Rights Offer Summary and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Hansol Technics Rights Offer Summary
  2. Kosaido: The Bull Case, The Bear Case, and the Base Case

1. Hansol Technics Rights Offer Summary

2

This post is a summary of Hansol Technics’s ₩52bil rights offer. Capital increases by 45.23%. Stockholders get new shares at a 0.37353 to 1 ratio. This is a standby underwriting. There is no cancellation risk. More details on this event are as follows.

2. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Industrials: Hansol Technics Rights Offer Summary and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Hansol Technics Rights Offer Summary
  2. Kosaido: The Bull Case, The Bear Case, and the Base Case
  3. 6954 🇯🇵 Fanuc • Timing the Cycle

1. Hansol Technics Rights Offer Summary

2

This post is a summary of Hansol Technics’s ₩52bil rights offer. Capital increases by 45.23%. Stockholders get new shares at a 0.37353 to 1 ratio. This is a standby underwriting. There is no cancellation risk. More details on this event are as follows.

2. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

3. 6954 🇯🇵 Fanuc • Timing the Cycle

2019 04 25 16 59 32

Source: Japan Analytics

FANUC (6954 JP)‘s FY2019 results were released on 25th April, and the detail and the downside risk has been well-covered by Lightstream’s Mio Kato in Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside. This Insight will look instead at the company’s earnings cycle and its relationship with Fanuc’s Relative Price Score. In the DETAIL section below, we shall also look at the company’s forecast history, Comprehensive Income, cash flows, shareholder returns and historical valuation trends. Although we share some of Mio’s concerns, we do not share his view that “the stock can trade down towards 1.0-1.5x PB – it does not strike us as impossible for the stock to halve”. Although the upside may be constrained, we believe the 25th December 2018 low of ¥15,760 will be the current cycle low point.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Industrials: Huawei Investment & Holding– In the Eye of the Storm (Part I) and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Huawei Investment & Holding– In the Eye of the Storm (Part I)
  2. Singapore REIT: Sabana REIT in Focus as Sector Consolidation Goes On
  3. Trump Trade Means Lynas Capex Easier
  4. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted
  5. Global Indexes Are Consolidating, EM Is Breaking Down

1. Huawei Investment & Holding– In the Eye of the Storm (Part I)

Huawei%20operations%20dec%202018

Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of Huawei Technology (40978Z CH) , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.

We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei’s ability to repay its bonds.

In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.

The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.

2. Singapore REIT: Sabana REIT in Focus as Sector Consolidation Goes On

Aei%20of%20ntp

InfinitySub, a subsidiary of ESR Cayman, is raising its stake in the SPV which owns the manager of Sabana Shari’Ah Compliant Reit (SSREIT SP) (Sabana REIT) and buying units in the REIT in a S$62.2mn deal through a set of transactions. This ESR’s second attempt to acquire Sabana REIT after talks of unit/asset sales to ESR REIT was aborted in 2017. 

Based on current year DPU of 3.0 cents (annualized based on 1Q19 DPU), the yield of 7.1% is unimpressive and the REIT continues to face challenging market conditions and the likelihood of negative rental reversions. The entry of ESR Cayman as the controlling shareholder is definitely welcome as it may bring about a swifter reconstitution of Sabana REIT’s existing portfolio and a brighter prospect of acquisitions.   

Sabana REIT’s estimated debt headroom of about S$190mn before hitting the regulatory gearing limit is by no means considered high. However, having a new sponsor such as ESR Cayman may give Sabana REIT more options for manoeuvre.  

The  vendor, Vibrant (VIBG SP) has obtained a waiver from the SGX for holding an extraordinary general meeting (EGM) for shareholders to approve the deal as the transactions are price- and time-sensitive.

3. Trump Trade Means Lynas Capex Easier

Screenshot%202019 05 24%20at%2012.25.24%20am

The last two days have been pretty spectacular for the shares of Lynas Corp Ltd (LYC AU). While it is not clear what has changed OTHER than a heightening of tensions in the trade war, several factors may be to ‘blame.’

With the blocking of all US hardware and software sales to Huawei after a White House Executive Order on Information Security late last week (temporarily mitigated two days ago by a 90-day temporary general license aimed at easing the transition), the question on everyone’s lips was how China would respond. The first response was that China would cease doing business with anyone who ceased doing business with Huawei. That seemed a countermeasure designed to be reciprocal. 

While Huawei founder Ren Zhengei has made several public statements in Chinese social and state media (many of which appear to be abbreviated for maximum effect – read the details folks!) in recent days, the perception is that Chinese leaders have been quiet. One exception to that was a visit by China President Xi Jinping to rare earth company JL Mag Rare-Earth Co Ltd (300748 CH), in Jiangxi province on Monday. That led to rampant speculation on the share prices of Chinese rare earth companies, and the idea that it was symbolic of what China might do to the US (block rare earth exports). 

Monday the 20th May saw a pre-market release of a notification of an MOU of a JV between Lynas and US company Blue Line to create a rare earths separation facility in the US. The JV would be majority-owned by Lynas, and would initially concentrate on heavy rare earth (Dysprosium and Terbium) separation but could also include light rare earth (Neodymium, Praseodymium, Lanthanum) separation facilities at a facility on a site currently owned by Blue Line. This strikes me as an obvious thing for which a miner would issue a press release. The two companies already work together, and it promises nothing. It is, however, a project to work on working on a project, and is more designed to elicit interest from other parties to fund it.

The 21st May saw Investor Day in Sydney and the stock popped 14.4%, following that by a 7+% move on the 22nd (yesterday) temporarily clearing the highest 3mo moving average seen in the last five years.

data source: tradingview.com

The question is what has changed and was that change worth a 20+% move in two days?

4. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted

Comp%20chart 22may19

On May 21, 2019 Crane Co (CR US) announced a proposal to acquire Circor International (CIR US), a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45 per share in cash, for a total equity value of $895 million and a total enterprise value of $1.55 billion ($1.7 billion if net pension liability is included). The proposal price of $45 represents a 47% premium over the May 20, 2019 CIR US closing price of $30.66. 

Crane held a conference call and released a slide presentation on its proposal with more details. In this piece I evaluate the proposal and the impediments standing in Crane’s way of winning this deal.

5. Global Indexes Are Consolidating, EM Is Breaking Down

Untitled

We remain constructive on global equities as the MSCI ACWI, ACWI ex-U.S., and EAFE indexes consolidate above their respective 200-day moving averages. On the other hand, the MSCI EM index is breaking below its 200-day moving average and is flirting with a breakdown below 56,000 support (local currency).  We see attractive Opportunities in Manufacturing & Materials in Europe, Japan and China, India, and Taiwan. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Industrials: Kosaido: The Bull Case, The Bear Case, and the Base Case and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Kosaido: The Bull Case, The Bear Case, and the Base Case
  2. 6954 🇯🇵 Fanuc • Timing the Cycle
  3. AGM Sunpower: Green Investments (GI) To Drive Re-Rating Going Forward; Remains Top Pick for 2019
  4. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis

1. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

2. 6954 🇯🇵 Fanuc • Timing the Cycle

2019 04 25 16 59 32

Source: Japan Analytics

FANUC (6954 JP)‘s FY2019 results were released on 25th April, and the detail and the downside risk has been well-covered by Lightstream’s Mio Kato in Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside. This Insight will look instead at the company’s earnings cycle and its relationship with Fanuc’s Relative Price Score. In the DETAIL section below, we shall also look at the company’s forecast history, Comprehensive Income, cash flows, shareholder returns and historical valuation trends. Although we share some of Mio’s concerns, we do not share his view that “the stock can trade down towards 1.0-1.5x PB – it does not strike us as impossible for the stock to halve”. Although the upside may be constrained, we believe the 25th December 2018 low of ¥15,760 will be the current cycle low point.

3. AGM Sunpower: Green Investments (GI) To Drive Re-Rating Going Forward; Remains Top Pick for 2019

25 4 2019%201 07 56%20pm

Sunpower Group (SPWG SP) hosted its annual meeting on 25/04/19 at the Marina Mandarin hotel. 

After an overview of FY18 results, the board of directors was engaged with shareholders in an hour of Q&A. We provide the highlights below.

Late last year I gave five high conviction ideas for 2019 in Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019 and Sunpower Group (SPWG SP) was on that list.

Shares have appreciated +62% YTD but continue to offer exceptional value for patient investors as the GI transformation story is still poorly understood by investors.

My Fair Value estimate of 1 SGD remains unchanged (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus).

4. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis

We consider the tone of HCM’s setsumeikai to have been largely positive. While guidance looked very weak, on a constant currency basis the company expects earnings to grow with strong results in the mining and value chain businesses offsetting potential weakness in China and Europe. While unit sales in China look a little frothy with local manufacturers becoming very aggressive on pricing, on the whole we believe the market has prematurely priced in a downturn while we expect mining demand to support continued strong results.

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Brief Industrials: DHICO Rights Offer: Arb Trade Situation Update and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. DHICO Rights Offer: Arb Trade Situation Update

1. DHICO Rights Offer: Arb Trade Situation Update

5

We are now on the last trading day of subscription rights. In the last 4 trading days, we have seen extremely high level of arb trades. Both approaches, arb trade and outright shorting, still seem to be working even at this point. More details are as follows.

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Brief Industrials: Singapore REIT: Sabana REIT in Focus as Sector Consolidation Goes On and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Singapore REIT: Sabana REIT in Focus as Sector Consolidation Goes On
  2. Trump Trade Means Lynas Capex Easier
  3. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted
  4. Global Indexes Are Consolidating, EM Is Breaking Down
  5. Trump Pressures the Korean Government to Ban Huawei in Korea – The Biggest Gray Rhino Event of 2019?

1. Singapore REIT: Sabana REIT in Focus as Sector Consolidation Goes On

Debt%20maturity

InfinitySub, a subsidiary of ESR Cayman, is raising its stake in the SPV which owns the manager of Sabana Shari’Ah Compliant Reit (SSREIT SP) (Sabana REIT) and buying units in the REIT in a S$62.2mn deal through a set of transactions. This ESR’s second attempt to acquire Sabana REIT after talks of unit/asset sales to ESR REIT was aborted in 2017. 

Based on current year DPU of 3.0 cents (annualized based on 1Q19 DPU), the yield of 7.1% is unimpressive and the REIT continues to face challenging market conditions and the likelihood of negative rental reversions. The entry of ESR Cayman as the controlling shareholder is definitely welcome as it may bring about a swifter reconstitution of Sabana REIT’s existing portfolio and a brighter prospect of acquisitions.   

Sabana REIT’s estimated debt headroom of about S$190mn before hitting the regulatory gearing limit is by no means considered high. However, having a new sponsor such as ESR Cayman may give Sabana REIT more options for manoeuvre.  

The  vendor, Vibrant (VIBG SP) has obtained a waiver from the SGX for holding an extraordinary general meeting (EGM) for shareholders to approve the deal as the transactions are price- and time-sensitive.

2. Trump Trade Means Lynas Capex Easier

Screenshot%202019 05 22%20at%2010.18.09%20pm

The last two days have been pretty spectacular for the shares of Lynas Corp Ltd (LYC AU). While it is not clear what has changed OTHER than a heightening of tensions in the trade war, several factors may be to ‘blame.’

With the blocking of all US hardware and software sales to Huawei after a White House Executive Order on Information Security late last week (temporarily mitigated two days ago by a 90-day temporary general license aimed at easing the transition), the question on everyone’s lips was how China would respond. The first response was that China would cease doing business with anyone who ceased doing business with Huawei. That seemed a countermeasure designed to be reciprocal. 

While Huawei founder Ren Zhengei has made several public statements in Chinese social and state media (many of which appear to be abbreviated for maximum effect – read the details folks!) in recent days, the perception is that Chinese leaders have been quiet. One exception to that was a visit by China President Xi Jinping to rare earth company JL Mag Rare-Earth Co Ltd (300748 CH), in Jiangxi province on Monday. That led to rampant speculation on the share prices of Chinese rare earth companies, and the idea that it was symbolic of what China might do to the US (block rare earth exports). 

Monday the 20th May saw a pre-market release of a notification of an MOU of a JV between Lynas and US company Blue Line to create a rare earths separation facility in the US. The JV would be majority-owned by Lynas, and would initially concentrate on heavy rare earth (Dysprosium and Terbium) separation but could also include light rare earth (Neodymium, Praseodymium, Lanthanum) separation facilities at a facility on a site currently owned by Blue Line. This strikes me as an obvious thing for which a miner would issue a press release. The two companies already work together, and it promises nothing. It is, however, a project to work on working on a project, and is more designed to elicit interest from other parties to fund it.

The 21st May saw Investor Day in Sydney and the stock popped 14.4%, following that by a 7+% move on the 22nd (yesterday) temporarily clearing the highest 3mo moving average seen in the last five years.

data source: tradingview.com

The question is what has changed and was that change worth a 20+% move in two days?

3. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted

Comp%20chart 22may19

On May 21, 2019 Crane Co (CR US) announced a proposal to acquire Circor International (CIR US), a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45 per share in cash, for a total equity value of $895 million and a total enterprise value of $1.55 billion ($1.7 billion if net pension liability is included). The proposal price of $45 represents a 47% premium over the May 20, 2019 CIR US closing price of $30.66. 

Crane held a conference call and released a slide presentation on its proposal with more details. In this piece I evaluate the proposal and the impediments standing in Crane’s way of winning this deal.

4. Global Indexes Are Consolidating, EM Is Breaking Down

Untitled

We remain constructive on global equities as the MSCI ACWI, ACWI ex-U.S., and EAFE indexes consolidate above their respective 200-day moving averages. On the other hand, the MSCI EM index is breaking below its 200-day moving average and is flirting with a breakdown below 56,000 support (local currency).  We see attractive Opportunities in Manufacturing & Materials in Europe, Japan and China, India, and Taiwan. 

5. Trump Pressures the Korean Government to Ban Huawei in Korea – The Biggest Gray Rhino Event of 2019?

The Huawei crisis has finally erupted in Korea. The Huawei crisis will now likely be one of the most important events facing the Korean economy in the coming months. Chosun Daily reported yesterday that the US government has requested the Korean government for an “eventual ban” of Huawei products in Korea. In the past several weeks, the US government has privately communicated to the Korean government that there could be severe security issues if Korea continues to use Huawei products. 

It is clear that if the South Korean government takes a firm stance to ban Huawei products, the Chinese government will certainly retaliate against this. 

In our view, it is highly unlikely for the Korean government to make any changes to the current stance on Huawei in the next several months, mainly because of the Moon Jae-In administration’s attempts to maintain a close relationship with the Chinese government. The more likely scenario is that this issue gets extended until next year after the South Korean National Assembly election in April 2020, mainly due to the enormous political consequences if the status quo is changed.

For the prudent investors in the Korean stock market, if they believe that this Huawei crisis will morph into something bigger, it may make sense to become more cautious in key sectors of the Korean economy, including the cosmetics, apparel, and hotels & leisure which the Chinese government can really cause some damage quickly with a few damaging words from Xi Jinping.

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Brief Industrials: Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside

1. Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside

Fanuc%20robomachine

Fanuc Corp (6954 JP) reported earnings today with results of ¥163bn OP beating consensus of ¥157bn. For the second year in a row guidance was shocking at ¥75bn vs. consensus at ¥133bn. Our immediate reaction was that it was just Fanuc being Fanuc and our back of the envelope guesstimate had us suggesting that maybe consensus needed to come down about 10%. After taking a deeper look at the numbers however, we have significant concerns.

Guidance still looks conservative, but we feel consensus may have to come down significantly more than 10%.

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Brief Industrials: Trump Trade Means Lynas Capex Easier and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Trump Trade Means Lynas Capex Easier
  2. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted
  3. Global Indexes Are Consolidating, EM Is Breaking Down
  4. Trump Pressures the Korean Government to Ban Huawei in Korea – The Biggest Gray Rhino Event of 2019?
  5. SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

1. Trump Trade Means Lynas Capex Easier

Screenshot%202019 05 24%20at%2012.25.24%20am

The last two days have been pretty spectacular for the shares of Lynas Corp Ltd (LYC AU). While it is not clear what has changed OTHER than a heightening of tensions in the trade war, several factors may be to ‘blame.’

With the blocking of all US hardware and software sales to Huawei after a White House Executive Order on Information Security late last week (temporarily mitigated two days ago by a 90-day temporary general license aimed at easing the transition), the question on everyone’s lips was how China would respond. The first response was that China would cease doing business with anyone who ceased doing business with Huawei. That seemed a countermeasure designed to be reciprocal. 

While Huawei founder Ren Zhengei has made several public statements in Chinese social and state media (many of which appear to be abbreviated for maximum effect – read the details folks!) in recent days, the perception is that Chinese leaders have been quiet. One exception to that was a visit by China President Xi Jinping to rare earth company JL Mag Rare-Earth Co Ltd (300748 CH), in Jiangxi province on Monday. That led to rampant speculation on the share prices of Chinese rare earth companies, and the idea that it was symbolic of what China might do to the US (block rare earth exports). 

Monday the 20th May saw a pre-market release of a notification of an MOU of a JV between Lynas and US company Blue Line to create a rare earths separation facility in the US. The JV would be majority-owned by Lynas, and would initially concentrate on heavy rare earth (Dysprosium and Terbium) separation but could also include light rare earth (Neodymium, Praseodymium, Lanthanum) separation facilities at a facility on a site currently owned by Blue Line. This strikes me as an obvious thing for which a miner would issue a press release. The two companies already work together, and it promises nothing. It is, however, a project to work on working on a project, and is more designed to elicit interest from other parties to fund it.

The 21st May saw Investor Day in Sydney and the stock popped 14.4%, following that by a 7+% move on the 22nd (yesterday) temporarily clearing the highest 3mo moving average seen in the last five years.

data source: tradingview.com

The question is what has changed and was that change worth a 20+% move in two days?

2. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted

Cir%20ceo%20compensation

On May 21, 2019 Crane Co (CR US) announced a proposal to acquire Circor International (CIR US), a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45 per share in cash, for a total equity value of $895 million and a total enterprise value of $1.55 billion ($1.7 billion if net pension liability is included). The proposal price of $45 represents a 47% premium over the May 20, 2019 CIR US closing price of $30.66. 

Crane held a conference call and released a slide presentation on its proposal with more details. In this piece I evaluate the proposal and the impediments standing in Crane’s way of winning this deal.

3. Global Indexes Are Consolidating, EM Is Breaking Down

Untitled

We remain constructive on global equities as the MSCI ACWI, ACWI ex-U.S., and EAFE indexes consolidate above their respective 200-day moving averages. On the other hand, the MSCI EM index is breaking below its 200-day moving average and is flirting with a breakdown below 56,000 support (local currency).  We see attractive Opportunities in Manufacturing & Materials in Europe, Japan and China, India, and Taiwan. 

4. Trump Pressures the Korean Government to Ban Huawei in Korea – The Biggest Gray Rhino Event of 2019?

The Huawei crisis has finally erupted in Korea. The Huawei crisis will now likely be one of the most important events facing the Korean economy in the coming months. Chosun Daily reported yesterday that the US government has requested the Korean government for an “eventual ban” of Huawei products in Korea. In the past several weeks, the US government has privately communicated to the Korean government that there could be severe security issues if Korea continues to use Huawei products. 

It is clear that if the South Korean government takes a firm stance to ban Huawei products, the Chinese government will certainly retaliate against this. 

In our view, it is highly unlikely for the Korean government to make any changes to the current stance on Huawei in the next several months, mainly because of the Moon Jae-In administration’s attempts to maintain a close relationship with the Chinese government. The more likely scenario is that this issue gets extended until next year after the South Korean National Assembly election in April 2020, mainly due to the enormous political consequences if the status quo is changed.

For the prudent investors in the Korean stock market, if they believe that this Huawei crisis will morph into something bigger, it may make sense to become more cautious in key sectors of the Korean economy, including the cosmetics, apparel, and hotels & leisure which the Chinese government can really cause some damage quickly with a few damaging words from Xi Jinping.

5. SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have made announcements they intend to spin-off certain divisions.

These spin-offs remain subject to Exchange approvals and market conditions.

While they are not yet “live” as situations, they deserve a look because spin-offs create new parent/subsidiary relationships, leading to Relative Value trade ideas going forward, which will be dependent on the spin-off’s liquidity and the % market cap held by the parent.

Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

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Brief Industrials: Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside
  2. StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”

1. Fanuc: Profitability Deterioration and Share Price Rebound Open Up Significant Downside

Fanuc%20robomachine

Fanuc Corp (6954 JP) reported earnings today with results of ¥163bn OP beating consensus of ¥157bn. For the second year in a row guidance was shocking at ¥75bn vs. consensus at ¥133bn. Our immediate reaction was that it was just Fanuc being Fanuc and our back of the envelope guesstimate had us suggesting that maybe consensus needed to come down about 10%. After taking a deeper look at the numbers however, we have significant concerns.

Guidance still looks conservative, but we feel consensus may have to come down significantly more than 10%.

2. StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”

24%20jan%202019%20su

This week in StubWorld …

  • A potential placement from a key shareholder is just one of the rumours behind Ayala Corporation (AC PM)‘s recent underperformance.

Preceding my comments on Ayala, are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.